Christian Clausen, the president of the European Banking Federation, criticized regulators for pursuing a model he said ignored the reality of national needs.

Efforts to harmonize banking standards across borders create challenges for some markets, Clausen said on Tuesday in an interview in Stockholm. He says a prime example of this is a European Banking Authority proposal that would force some Scandinavian banks to cut their holdings of covered bonds to make room for sovereign debt.

“If you have different realities, then either you need to create the same reality -- i.e. Sweden gets to look like Italy or Germany -- or you make a rule that fits the reality,” said Clausen, who’s also the chief executive officer of Nordea Bank AB. “But making a rule that is designed for another reality is of course not that smart.”

The criticism strikes at the heart of Europe’s vision to create common standards across borders to be overseen by a single supervisory authority. Tension around the project has grown as industry representatives say regulatory plans to treat sovereign debt as risk-free fly in the face of experience. The EBA’s proposal would give bonds sold by bailed-out nations including Greece and Portugal a higher liquidity status than top-rated covered bonds sold in Denmark or Sweden.

“It’s a bit awkward that Europe cannot make these adjustments,” Clausen said. “You must be able to accommodate rules to the system.”

In Scandinavia, where governments have maintained debt loads that are less than half the average in the eurozone, bankers’ groups have railed against the London-based EBA’s plan. Denmark points out that the proposal ignores the EBA’s own empirical observations, published in an October study.

The Danes want the European Commission to dismiss the EBA’s proposal, arguing failure to do so would risk destabilizing a market that survived the global financial crisis better than most. Denmark has won backing from industry groups in Scandinavia and Germany.

“The Danish banking system is challenged because of rigid rules that are well applied to other countries but not to Denmark,” Clausen said. “In Denmark we have a mortgage system that has been working through the crisis and that’s been working for hundreds of years with no losses. We can even demonstrate that the mortgage bonds are more liquid than government bonds.”

Denmark’s $550 billion mortgage-backed covered bond market is the world’s largest per capita and more than three times the size of the nation’s government debt market. Danish banks use covered bonds to fill about 75 percent of their liquidity buffers, compared with an EBA proposal to cap use at 40 percent.

“We need to calibrate it gradually,” Clausen said. “It’s not about getting different rules but to acknowledge that the system is different -- unless you want to create exactly the same economic system in each country.”

In Sweden, a stable AAA-rated nation boasting Europe’s best-capitalized banks, cross-border regulatory goals are at odds with the nation’s pension model, Clausen said. Banks in the largest Nordic economy have smaller deposit bases than lenders elsewhere because Swedes traditionally place their savings in investment funds.

“You can ask yourself whether we in Sweden want the same financial system as they have in Italy, or in Germany, or in France? Probably not,” Clausen said. “We like very much that we have a funded pension system with a lot of mutual fund investments, where private households have nearly three times as many assets as loans. That’s certainly not the case in Italy, where 65 percent of savings are in deposits at banks.”

The EBA will this year test a sample of 124 banks that cover more than half of each European Union member state’s banking industry. Banks will have to show their capital won’t dip below 5.5 percent of assets in an economic crisis.

At the same time, the European Central Bank is carrying out a three-stage Comprehensive Assessment of euro-area banks before it takes over banking supervision for the region in November. The third phase comprises stress tests.

Once the industry has made it through the tests, some banks may start selling assets that don’t satisfy return goals, Clausen said. “There is still pressure on banks to get their return back to more than their cost of capital.” It’s likely that a number of lenders will make “some structural changes to get their return up to where the market requires it to be for them to get capital,” he said.

Nordea, which last year sold its banking operations in Poland, plans to stay in the Nordic and Baltic countries and in Russia, Clausen said. The lender’s core Tier 1 ratio, excluding transition rules, increased to 14.9 percent of risk-weighted assets at the end of last year, from 14.4 percent at the end of September, making it one of the best capitalized major banks in Europe.

For the rest of Europe’s financial industry, investors no longer need to fear the worst, Clausen said.

“The asset quality reviews and the stress tests coming up now will toward the end of the year clarify and once and for all settle the trust issue in European banks,” he said. “That will clarify things enough to say OK, European banks are fine. Some have more to do, but they won’t go bankrupt tomorrow.”